Japan lifts mood in world markets

The FTSE 100 index broke through the 5,000-point barrier yesterday with a record one-day points gain, with sentiment buoyed by new proposals to tackle the troubled Japanese banking system as well as hopes of lower interest rates.

However, analysts cautioned against over-optimism, saying that the world stock market bounce did not appear to be justified by fundamentals.

All the major Asian and European markets closed higher, while in New York, the Dow Jones Industrial Average was up strongly at lunchtime, trading up 124.35 points at 8023.87.

In the bond markets, prices of both gilts - UK government bonds - and Italian government bonds continued to fall, although prices of other European bonds stabilised following their sharp falls on Friday.

The United States bond market was closed for holiday, although analysts were predicting further falls today after Friday's declines.

Ken Wattret at Paribas commented: "To be honest, it is difficult to judge what is happening in the markets on a day-to-day basis. There are a lot of wild swings in sentiment".

Weaker-than-expected UK producer price data - which showed manufacturing prices at a 40-year low - boosted hopes of further cuts in UK interest rates, according to City economists, and helped propel the FTSE up 214.2 points - or 4.44 per cent - to close at 5037.60.

Investors were also cheered by a rare piece of good news from Tokyo, where the Upper House passed a key piece of banking reform legislation and the government said it was considering injecting as much as 67 trillion yen (pounds 300bn) into its troubled financial system. The Nikkei closed up 675.04 points - or 5.24 per cent - at 13,555.01, while Hong Kong's Hang Seng closed up 483.48 points at 8990.27.

However, many analysts were sceptical about the prospects for effective financial reform in Japan, saying there had been a "history of false dawns".

Indeed, by yesterday evening, the first cracks had already started to appear in the Japanese banking plan, with disagreement among politicians about the details of the proposals. The yen slid back to 118 per dollar from overnight highs of around 115.10.

In the bond markets, profit-taking, combined with worries about the medium- term health of the public finances helped push gilt prices yet lower.

Italian bond prices also fell over worries about political stability.

The latest Merrill Lynch/ Gallup survey of UK fund managers also found evidence of profit-taking in bonds.

The survey - conducted between 5 October and 7 October - revealed that sellers of gilts outnumbered buyers by 23 per cent, the third highest reading since the survey began in 1990. UK managers have started moving back into equities, according to Trevor Greetham, a global strategist for Merrill Lynch, even though they believe that UK economic growth will slow sharply next year.

New producer price data, coupled with another weak survey from the British Retail Consortium, added to the picture of a slowing domestic economy.

The BRC said sales last month were just 1.2 per cent higher than in September 1997. Meanwhile, according to the Office for National Statistics (ONS), manufacturers' output prices rose by just 0.3 per cent year-on-year last month, the lowest year-on-year rise since March 1960.

Excluding food, beverages, tobacco and petroleum, output prices fell by 0.1 per cent in the year to September, the first fall since 1959.

The prices of materials and fuel bought by the manufacturing industry fell by 1 per cent between August and September. The ONS added that statistical revisions of producer prices - in particular, rebasing - meant that prices in recent years had been rising by marginally less than was first thought.